Building a Successful SaaS Business

Chen Amit sat down with the host of the Official SaaStr Podcast, Harry Stebbings, to discuss his experiences building a successful startup. Highlights include:

• Why ignoring customer feedback can be critical to success
• Why founders need to change the way they think about LTV
• How to create a pricing model that aligns your success with your customers

Check out the transcript below or listen to the podcast here.

Harry Stebbings: We are back for another week in the world of SaaStr. I’m thrilled to welcome Chen Amit, CEO & Co-Founder of Tipalti. To start with a little bit of context, how did you make your way into the wonderful world of tech and startups?

Chen Amit: I started in the tech world many years ago—I was a geek programmer before the word geek was invented. I was always starting new businesses, new projects, even at the start of my career. Initially, I was a member of teams that started new businesses. Then I transferred to leading new businesses. 

In terms of starting Tipalti, I sold another company in the telecommunication space in 2008. I was living in the Bay Area at that time, then moved back to Israel. At some point in time, I called Oren Zeev, my Tipalti co-founder, and told him that I was itching to do something different and asked if he knew of any interesting opportunities. Three or four months later, he called me and said, “one of my founders described this interesting problem to me,” and the rest is history.

Harry Stebbings: Post that, when you embarked on trying to solve that problem, you were the only employee. Why did you start that way? And what were the benefits?

Chen Amit: When I met the founder of that portfolio company he described the problem. Initially, it sounded like an obvious issue—paying suppliers, paying payees, so obvious. It should have been available since the beginning of money. Then I started the research, and I immediately met another founder who expressed the same pain, but the next dozen companies I met were not as positive. They said, “don’t do that. There’s no pain. We have other alternatives,” and it discouraged me from going that way.

I was in this conundrum. I had two people who were very passionate about the pain and the need to solve it. And then there were others, who I equally respected, that said don’t bother. So I thought, what do I do? There were two options. One was to prove to myself that there was a company here and start building. The other was to keep it as a project and solve for just these two founders. I love programming, and I hadn’t gotten to program for 17 years, so I decided to run it as a project. And I was really happy. I was sitting with these two founders, exploring their pains, starting to develop more, getting feedback, adjusting, and solving programming problems—I loved that year.

Within six months, I had a live solution that was revenue-generating, and I had two happy customers. By the end of the year, I had four customers with one of those customers in a competitive situation with a well-established 500-person company. I felt confident that I was onto something.

The next question was, does it work in the US? The Israeli market is limited, so is there the same pain with US-based companies? I like to say that I doubled the company and went global. From one person in Israel, we became two people, with the other in L.A. and responsible for exploring customer opportunities and trying to gain wins in the US. Very quickly, we won two customers, one of which is still among our top 10.

For the second year, it was mostly me managing all the Engineering and Product and Sales out of Israel, with the L.A. employee supporting me in the US. Later, we decided that this was company-worthy and that it was time to accelerate, raise more money, hire people, and establish an office.

Harry Stebbings: I think a big thing that early-stage companies struggle with is the balance between what the product roadmap looks like versus what they have today. How do you advise founders on this balance and what works when successfully selling to large companies as a very young business?

Chen Amit: Early-stage companies—I like the analogy that it’s like riding a motorcycle at full speed toward the edge of a cliff with the road crumbling below your wheels—it’s a risky endeavor, and you have to take risks and devote yourself to addressing those risks. The moment our first customer went live, the system collapsed for half a day, and we just had to scramble and solve it. But that was a great teaching moment for us, and we grew from that.

Our second customer was willing to move forward but wanted the legal agreements to be modified. So we scrambled, changed, adjusted, and solved for them. In the early days, you need to be completely responsive and commit to delivering the value that they expect from you. You won’t be able to provide a fully baked, mature product in the early days, so you have to be agile and you have to listen and adapt very quickly. There’s no way around that.

Harry Stebbings: How do you determine what customer feedback to listen to and what customer feedback to disregard?

Chen Amit: Great question. I love that question because I feel that I built my career and confidence as a product person around saying no to my customer. I’ll give you an example—I was in the telecommunications world way back in ’96 when the internet just started, and ADSL was not something known. Deutsche Telekom, one of the largest carriers in the world and one of our largest customers, told us that they didn’t like how we built the system. And I felt strongly that the only way that the product was going to succeed was by ignoring this advice.

Later, they bought billions of dollars of that product. The reason I was so adamant about it was that we had a strategy for the product—it was mass market and low cost, and those reasons were why I needed to decline that customer feedback. And I was right. 

The same is true for Tipalti—it’s part of our strength that our customers need someone else to solve this problem. You need to have the backbone to have a strategic vision and know the key success factors. And even if the customer tells you that the way you’re going about it is wrong, you need to trust that you have the right strategy and vision to proceed your way.

It’s a balancing act—you need to listen and internalize and believe in what the customer says, and if you do not believe in it, then you shouldn’t follow it.

Harry Stebbings: I think a lot of early-stage founders are nervous about pushing back with customers, especially large customers. Is there a right way to frame your discussion and disagreement in terms of the product moving forward?

Chen Amit: In the Deutsche Telekom example, it was the chief architect of that project who said, “we don’t like how you do it.” And I explained our vision to him. I said, “I hear you, and I understand what you’re saying. I’ll open it up for your version, but just know that you might lose deals.” Eventually, he allowed our variant, and we won against the giants of the world because it created such a competitive advantage that others could not compete.

Sometimes it’s not always like that, and you lose customers that aren’t willing to work with you. But I’m willing to lose them because I believe in the vision, I believe in the strategy, and I believe that this is critical for our success, the customer’s success, and for our ability to support the customer. So the way to engage in a professional discussion is to explain your vision, show how it aligns with the customer’s vision, and prove why deviating from it will hurt both you and the customer. And if they understand it, then they will play ball. If they don’t understand it, then you need to be willing to lose that customer.

Harry Stebbings: I think it’s a really strong mindset to adopt—when they convert and align with you, obviously the company sales scale. You moved from that early-stage company to a growth stage company with hundreds of employees—what’s the biggest difference for you between growth and early-stage from a leader’s perspective?

Chen Amit: One of the things I love most about my job is that it changes every year. In the early days, I was the product manager, the programmer, the content, the marketing, the website programmer, etc. At that time, if you called our line, you had to press one for marketing, press two for support, press three for finance, and they all led to me—but it gave off a sense that it was a bigger company than it was.

Initially, you’re doing everything, and it all relies on you. Then you have more people that you need to teach, and you let go a little bit. You still know everything, but you don’t do everything. For the first three or four years, I was still coding part of the time. Then you do less because you have more people, more managers that you need to train, enable, and empower. Today, my role is completely different—It’s more about setting the vision, strategy, hiring executives, and fundraising.

And there’s one other part of my job, which I call starting fires. Every few months, I will start a small fire, whether it is to burn that grass or expose an opportunity, but you’re in the position to see all of those opportunities. You have a large team, and they see many of the opportunities themselves, but another big difference between the early days and today is funding. In the early days, you have to fight to convince people of your vision. These days it’s more of a matrix exercise. The abundance of money is “unlimited.” You have to optimize for growth with the assumption of unlimited availability of funding.

Harry Stebbings: Focusing on growth, how should one consider this mindset of an infinite supply of capital? 

Chen Amit: We were fortunate to have great unit economics from the get-go because we only had a 1% annual dollar churn. When you have a 1% annual dollar churn, it cures so many other things. When Amazon was asked about payback periods, customer acquisition costs, and LTV to CAC, the answer they provided was that they’re willing to invest as much as they need to because their customers will continue to produce for them.

And when you have a 1% churn and lifetime value like we do that drives LTV to CAC indefinitely. We have a very high LTV, so we are less sensitive to the payback periods. Because our customers will keep producing for such a long time, we are willing for the CAC to go higher because we know that the lifetime value is so productive. I’m willing to invest in a business that has this ROI—we will get the return on investment later in the process.

For instance, we’re fine with some of our segments, 18 months, 12 months, 9 months, 21 months. Some segments exceed that timeline, but we won’t go beyond 24 months of payback period. However, given an unlimited supply of money, you need to be willing to invest more during this “land grab” phase. Our target market has roughly 600,000 companies in it, and we’re servicing 3, 4, or 5 percent of that market. It’s still a wide space, and it’s a land grab period. And I’m willing to invest more and accept a longer payback period because all the other key metrics—margins, churn, organic growth—is in a perfect situation.

Harry Stebbings: In terms of pricing mechanisms, how do you think about effective upselling and the pricing mechanism that’s worked for you?

Chen Amit: We price across three main levers. One of the three main levers is what we call SAS fees. At large, SAS fees would be the platform fee, monthly subscription per user—generally around the software and the usage of the software. For the most part, these are fixed with the exception of per user.

The other two levers are transaction fees and currency conversion fees. The more business the customer drives through Tipalti, the more revenue we have, and the faster and the further the customer grows. Essentially, the more they are successful, the more we are successful. And that’s what I love about transaction currency and conversion fees. 

Today in COVID times, if the customer business contracts, then we will contract with them. And I’m fine with that because the customer might be under pressure and cannot pay too much for the product. So the balance between some SAS fees and transaction currency conversion has worked wonders for us. Many of our customers are high growth companies. We’re based in San Francisco, and you have the Twitters and the Go Daddies, a lot of very high growth companies. The more they grow and the better they do, the better we do.

We have the SAS fees for a host of reasons, predominantly because we provide value through software, and we can show the ROI we bring through that value. The transaction currency conversion fees are paid mostly by the suppliers. Our customers pay the SAS fees—they have control. They can decide who pays what, but this balance allows us to generate revenue without hurting the customer too much and position the product for the value it provides.

Harry Stebbings: Do you find that there’s a tipping point? What was the tipping point that caused customers to go from managing 10% of their operations through Tipalti to 100 percent?

Chen Amit: Tipalti is a holistic supplier and payment management solution—onboarding, tax compliance, AML compliance, payments, reconciliation, and tax reporting. Because it’s such a holistic solution, it doesn’t make sense to manage anything but 100% of your operations with Tipalti. How would you do tax compliance? How would you do AML compliance? Would you have two systems for tax compliance, two processes for reconciliation? It just begs for a holistic, end to end solution. And I would say 98% of our customers use us exclusively for this use case.

For one of our customers, Twitter, there was an RFP for one business unit, MoPub, and then another business unit and another business unit. Today, literally every dollar for every supplier touches Tipalti in one way or another. So the model itself lends to defaulting on a business unit or a use case that does everything with us. And when that business unit grows, we grow with them. There’s not much of an upsell from that perspective—it’s more of an expansion to additional business units.

Harry Stebbings: In terms of expansion of the team—the world’s changed so seismically with COVID—how do you think about hiring when everyone is working from home?

Chen Amit: That’s a great question. Initially, we postponed our hiring at the beginning of COVID, but recently we re-energized back to the original plan. We are roughly 300 people, and we’re hiring another 100 people in the next six months. That is a major undertaking under COVID, so we’re doing the following things. One, we’re adding to the interview process stages, steps, and questions that are meant to evaluate if that individual is a good fit for a work from home environment. You need to be a self-starter. You need to be communicative. You need to be more social when you work from home. We try to assess those skills, especially because we’re in this environment where there’s more talent availability. Second, we are opting to hire more experienced people—we are now trying to limit the out of college hires and hire people with two or three years of experience so that they know what it’s like working in a company environment.

And last, we have three major offices, one in Israel, one in Vancouver, Canada, and one in San Mateo. When possible, we will opt to hire in the location where there is currently some work in the office. In Israel, we can work in the office. In Vancouver, we can work in the office. In San Mateo, we cannot. So for roles that don’t need to be based in San Mateo, we will prefer the other offices.

Harry Stebbings: I do want to move into my favorite element of any episode—the quick-fire round where I say a short statement, and you give me your immediate thoughts. First, what do you believe most that others around you may disbelieve?

Chen Amit: One thing today is that work from home is great, and it’s changing work for the better. And I believe that work from home is great for some, but not for all. And there’s data to support that younger, high-growth companies do worse in remote environments. I’m referring to companies that operate completely remotely, but the same is true for work from home. I think collaboration is lost—that magic that happens when people meet in the corridor. There’s a lot of value in that magic, especially when you’re building and creating. All those creative parts in a company’s life cannot be completely replaced when you work from home.

Harry Stebbings: How do you think the world of fundraising was impacted by work from home and remote work?

Chen Amit: For us, the reason we stopped hiring in March was because I didn’t know how the investor world would work. At our pace of growth, we still need to raise funds from the outside. I didn’t know what to expect, but we’re getting a ton of inbound from investors. And when speaking with fellow CEOs, I think the $50, $100, $200 million rounds will be easier and venture will possibly be a little bit harder.

For me, I am not engaging with investors that I don’t have a relationship with. I’m very careful with my investors, so I limit the people I speak with to people that I know and that I’m comfortable with.

Harry Stebbings: What single trait do you want to see most in an investor when you are selecting them?

Chen Amit: I’m spoiled because I’ve worked with Oren for so long, and I have a great team. But one of Oren’s traits that I love the most is that he is the most optimistic person I know, he’s always positive. And I think it’s a great trait for him to have.

And the other is that he lets me run the company. He provides advice. He provides connections. He makes intros. If I need to consult with him on a strategic topic, he’s the smartest person on the planet, but he doesn’t try to run the company with me. And I have had different experiences with VCs who just try to be too close with the CEO. I think you need to let the CEO run the company. So just his optimism and his ability to let the founders run the companies and provide value where he can.

Harry Stebbings: Final one, Chen—what’s the biggest challenge for you with your role today with Tipalti?

Chen Amit: I think there are two challenges. One is just growing at the pace we are, especially from a people perspective, while in COVID and predominantly working from home. This is a departure from our experience. Work from home works excellently with the existing team, but it will be a different exercise with 25% of the company joining and onboarding and learning the ropes while working from home. That is a challenge that we’re focusing our attention on and trying to build the processes and the systems that will allow us to be successful.

The other is also a people challenge, which is, how do you maintain your agility? How do you maintain speed aggressiveness and risk-taking when you grow—when 300 people become 400 then 600. What do we need to change to maintain agility, maintain aggressiveness, maintain risk-taking, and be safe? It’s a balancing act.